Suprised That Obama Tapped Inflation Hawk Hoenig for the FDIC? Don't Be

By Daniel Indiviglio

Although he's best known for his Fed dissents, he'll be tough on the big banks

Last year, those of us who cover the Federal Reserve owed a debt of gratitude to then Kansas City Fed President Thomas Hoenig. He kept things interesting. While all of other voting members of the central bank's monetary policy committee were committed to keeping interest rates low and stimulating the economy with more cash, Hoenig wasn't. He dissented at every single meeting in 2010. And he was the only one. While the other voting members were worried about unemployment, he was focused on inflation. So should it shock us that President Obama has nominated Hoenig to be Vice Chairman at the Federal Deposit Insurance Corporation? To understand why, just look at where he stands on big banks.

A Critic of the Big Banks

Those who have followed Hoenig a little more closely know that the rationale for Obama's decision is actually pretty obvious: he is not a fan of big banks. Back in 2009, he testified at a Joint Economic Committee hearing with several other economists on the problem of "Too Big to Fail." A few of the others who testified called for the big banks to be broken up. Although Hoenig was a little less aggressive on such action than they were, he seemed fairly open to the concept.

He has also stated that big banks should be regulated like utilities, even indicating his support for reinstating the section of the Glass-Steagall Act that would forbid banks to participate in both commercial and investment banking. But most importantly, in that hearing I attended, he also asserted that big banks that run into trouble should not be rescued and must fail.

In a June speech at New York University, he said that systemically important financial institutions, or SIFIs, are "fundamentally inconsistent with capitalism. They are inherently destabilizing to global markets and detrimental to world growth. So long as the concept of a SIFI exists, and there are institutions so powerful and considered so important that they require special support and different rules, the future of capitalism is at risk and our market economy is in peril."

Why the FDIC?

This last view is particularly relevant in light of his new role at the FDIC. The Dodd-Frank financial regulation bill arguably upped the FDIC's regulatory power more than any other agency. It provides the FDIC with the power to wind down giant, systemically important financial firms through the new resolution authority. It seems plausible that if Hoenig is a major part of that process, then he'll fight to make sure that big banks don't get any special treatment if the FDIC has to take them over.

But what about his views on inflation? They're irrelevant. Remember: the FDIC is very different from the Fed. His new employer will not have any input on monetary policy. It works on bank regulation and resolution, two areas where the president and Hoenig see eye-to-eye.

Republicans May Approve

Finally, Hoenig serves as a very rare sort of nomination for Obama in that Senate Republicans may actually consider him. Hoenig actually appears to learn towards the right as an economist -- just look at his Fed dissents. Many Republicans share his view that the Fed should have shown more concern for inflation and withheld additional stimulus.

Where they may disagree, however, is with Hoenig's toughness on big banks. Of course, any nominee that Obama provides the Senate for confirmation will likely upset Republicans in various ways. In this case, they'll have the opportunity to confirm someone who appears to lean to the right on some issues, which is probably about as much as they can hope for.

Considering the FDIC's power, having Hoenig on board could make things very interesting if a big bank runs into trouble. If Republicans don't block his nomination, then it should help to ensure that the FDIC uses its new resolution authority to really wind down banks and not just turn the process into a rescue operation. Hoenig may also have some input on the living wills that big banks must submit next year -- which the FDIC may reject if they find inadequate. If a big bank cannot provide a workable resolution plan, then regulators will consider breaking it up.